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We have been reporting on U.S. off shore tax enforcement coming to Singapore and Hong Kong (please see our e-bulletins here and here). The Indonesia tax amnesty (“the Amnesty”) is another major tax initiative that is occupying tax compliance and AML teams across financial institutions in Singapore and beyond. This e-bulletin provides an update on the initiative and its potential implications for Singapore banks, in particular with respect to anti-money laundering laws.
In a recent statement the Indonesian Ministry of Finance declared that to date approximately USD 361 million worth of funds held with Singapore financial institutions have been declared and USD 82 million have been repatriated under the Indonesian Tax Amnesty. It is estimated that potentially around USD 300 billion undeclared Indonesian funds may be held off-shore in Singapore.
The Indonesian Tax Amnesty Bill (Tax Law 11/2016) was passed and enacted on 1 July 2016. Under the Amnesty, Indonesian tax payers can declare off-shore funds and either keep them off-shore or repatriate them. The Amnesty is due to run until 31 March 2017. Depending on when previously undeclared funds are declared and whether they are repatriated, the participating tax payer will be required to pay a varying percentage ranging from 2% to 10% as “Redemption Charge” but will otherwise escape having to pay back taxes or penalties. Repatriated funds must be transferred into Indonesia using special accounts at authorized “Receiving Banks” and must be invested in certain investments in Indonesia for a minimum period of three years.
There have been suggestions that Singapore and/or banks in Singapore may take steps to “thwart” Indonesia’s tax amnesty to keep funds in Singapore. However, Singapore has made it clear that it has no interest in sheltering illicit tax monies and that it subscribes to internationally agreed standards for combatting money laundering and exchanging information.
The tax amnesty raises a number of issues under Singapore money laundering and reporting laws.
The evasion of foreign tax laws was elevated to a predicate offence under the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act (CDSA) in July 2013, with amendments made in September 2014 clarifying that dual criminality was not required. This means that a foreign serious tax offence may trigger AML obligations in Singapore regardless of whether that same conduct would constitute a serious tax offence if conducted in Singapore. It follows that as of July 2013 it is a criminal offence for financial institutions to knowingly acquire or assist a customer in retaining funds tainted by foreign tax evasion. Also, financial institutions are required to report any suspicious funds to the Suspicious Transaction Reporting Officer at the Singapore Police and to the Monetary Authority of Singapore (MAS).
This raises the question whether a financial institution needs to file a suspicious transaction report (STRs) as soon as an Indonesian customer indicates that he or she is considering participating under the tax amnesty. It raises the further question whether the financial institution will need to freeze the funds pending a decision by the Police as to whether it wishes to take any action.
Even assuming that the Police will not take any action in relation to the customer and the funds (which could be seen as steps aimed at thwarting the tax amnesty), the financial institution is likely to come under scrutiny by the MAS who may query the robustness of the financial institution’s customer due diligence (CDD) and AML processes and controls when onboarding and retaining accounts for Indonesian customers.
This has to be a real concern for financial institutions in Singapore in light of the fact that the MAS has made it clear in a number of recent statements and actions that it intends to step up its efforts to combat money laundering and terrorism financing in Singapore (see our e-bulletin here). Also, when foreign tax offenses were included in the schedule of predicate offences under the CDSA, the MAS issued guidance making it clear that they expected financial institutions to supplement their existing customer due diligence and monitoring measures to understand and assess as well as manage and mitigate their clients’ tax-risk profiles. Where a financial institution is faced with a considerable number of customers participating under the tax amnesty, there is a risk that the MAS will enquire whether appropriate steps were taken to supplement the financial institution’s CDD to detect potential tax evasion.
It is also interesting in this context that international banks have been considering very carefully whether to accept nominations to receive and handle repatriated funds in Indonesia. There are currently 77 banks that have been nominated by the Indonesian Finance Ministry as “Receiving Banks”, of which around 14 banks are international banks, and a number of international banks have referred to “international regulatory” concerns when considering whether to accept their nomination.
Although the Indonesian Finance Minister has indicated that take-up under the Amnesty to date is still significantly below target it has been stronger than under a previous amnesty launched in 2008. Also, more account holders are expected to come forward as the Indonesian authorities issue further implementing regulations which clarify a number of areas subject to uncertainties (most recently in relation to the status of Special Purpose Vehicles). Further, the fact that both Singapore and Indonesia have signed up to automatic exchange of information under the Common Reporting Standards (CRS) is likely to entice Indonesian tax payers to declare their funds before financial institutions in Singapore are forced to provide information on Indonesian (and other foreign) account holders under the CRS regime.
Although Singapore and Indonesia have not yet signed a bi-lateral agreement under the CRS regime required to allow for the exchange of information, both countries are due to start implementing CRS in 2018 and Indonesia has made it clear that it wants to prioritize the exchange of information with Singapore for obvious reasons. We are monitoring the situation closely together with our associated Indonesian firm Hiswara Bunjamin & Tandjung and will provide further information as this becomes available.